Issue 5 of The Covered Bond Report, with features on the US dollar market and documentation, Central & Eastern Europe (CEE), sovereign debt versus covered bonds, and much more. From http://news.coveredbondreport.com

1. The Covered
Bond Report
www.coveredbondreport.com November 2011
Australia CBPP2 CEE
Debuts under fire ECB straitjacketed Beyond the crisis

2. Covered
bonds?
Highly rated covered bonds backed by mortgages
Average LTV of 60.5%
Match-funded structure
Core capital ratio of 18.6%
Largest mortgage bond issuer in Europe
nykredit.com/ir
Figures as of 17 March 2011

3. The Covered
Bond Report CONTENTS
11
FROM THE EDITOR
3 Lands of opportunity
Monitor
LEGISLATION & REGULATION
4 Senate bill gives US momentum
7
RATINGS
12 S&P methodology helps resilience
MARKET
16 Aussie openers under fire
LEAGUE TABLES
23 Euro, multi-currency benchmarks
FULL DISCLOSURE
48 47 You are cordially invited…
November 2011 The Covered Bond Report 1

4. The Covered
CONTENTS Bond Report
24
Cover Story
24 For a few dollars more?
Susanna Rust
ANALYSE THIS
30 Sovereign belief undermined
30
Leef Dierks
and Jason Somerville
LEGISLATIVE ISSUES
36 CEE beyond the crisis
Maiya Keidan
LEGAL BRIEF: US DOCS & PROCESS
42 Papers, please
36 Jerry Marlatt
2 The Covered Bond Report November 2011

5. FROM THE EDITOR
Lands of opportunity
“G
o West, young man, go West
and grow up with the country.”
This famous exhortation
— widely attributed to 19th
century newspaper editor
Horace Greeley — has been
taken up with gusto by European covered bond bank-
ers. Seeking to grab a share of a market built on an $11tr
mortgage industry, they have travelled across the pond
in the hope that a US covered bond market will be born,
accompanied by European issuers eager to establish a
transatlantic trade.
A new Senate initiative to introduce legislation is an-
other step towards this goal, but with a key regulator —
the Federal Deposit Insurance Corporation — against
it and an election year imminent, these hopes could be
The Covered dashed.
Is the European industry condemned to a life of mis-
Bond Report ery, its fate in the hands of euro-zone politicians pre-
varicating to such an extent that even a new European
www.coveredbondreport.com Central Bank covered bond purchase programme can-
Editorial not rouse issuance? US targeted dollar deals will provide
Managing Editor Neil Day some business, but as disappointing Australian debuts
+44 20 7415 7185 have shown, any such relief may be fleeting.
nday@coveredbondreport.com
Could developing or emerging markets provide cause
Deputy Editor Susanna Rust
srust@coveredbondreport.com for hope? Not if common reactions to such enquiries —
Reporter Maiya Keidan “Pah!” or “Meh!” — are to be believed.
mkeidan@coveredbondreport.com True, some countries will take years to generate any-
thing like the kind of volume to get excited about in a
Design & Production
Creative Director: Garrett Fallon
context where Eu1bn has been a typical benchmark size.
Designer: Kerry Eggleton A reform of Romania’s covered bond law, for example, is
expected to yield — drum roll, please — perhaps Eu7bn,
Printing according to the CEO of one local bank.
Bishops
But when the countries in question are Brazil or In-
Advertising Sales dia, the calculations begin to make sense. Santander was
ads@coveredbondreport.com widely scorned for the price it paid for some Latin Amer-
ican assets a decade or so ago, but the naysayers have
Subscriber Services since been silenced.
subs@coveredbondreport.com
Of course, a sensitivity to local customs may be re-
Editorial quired in these new territories. One rating agency re-
editorial@coveredbondreport.com alised, for example, that a thorough legal analysis of
foreclosure procedures in an unnamed Southeast Asian
The Covered Bond Report is a country became redundant when it emerged that it was
Newtype Media publication
standard practice to bribe judges.
25, Finsbury Business Centre But hopefully bankers will not need to pack one item
40 Bowling Green Lane that was standard issue for HSBC’s early emerging mar-
London EC1R 0NE ket pioneers: a gun.
+44 20 7415 7185
Neil Day, Managing Editor
November 2011 The Covered Bond Report 3

6. MONITOR: LEGISLATION & REGULATION
Legislation & Regulation
HAGAN-CORKER ACT
Senate bill gives US push momentum
A bill introduced by Senators Kay Hagan A covered bond analyst said he was
and Bob Corker has been welcomed for surprised by the absence of “pro-FDIC”
giving renewed momentum to a push concessions given discouraging com-
for covered bonds in the US, although ments he had heard about the strength of
market participants have warned against the FDIC’s lobbying in the Senate.
over-optimism, particularly in light of A Hagan staffer told The Covered
continued FDIC concerns. Bond Report that the FDIC had neither
The two introduced the United States indicated support nor opposition to the
Covered Bond Act of 2011 on 9 Novem- bill, saying that the FDIC is always con-
ber with co-sponsors Democrat Chuck cerned about its repudiation and the
Schumer (NY) and Republican Mike treatment of assets in the event of a bank
Crapo (ID). The four Senators are mem- failure. He said that the Senators would
bers of the Senate Banking Committee, work with the FDIC going forward, as
the Senate body that proponents of the as- well as Senate Banking Committee chair-
set class have been hoping would take up man Johnson, with a hearing on the bill
the covered bond cause after a similar bill being targeted.
was passed by the House Financial Serv-
ices Committee in June. The Senate bill is “The only dark
aimed at creating a legislative framework
for covered bonds to expand the funding
cloud is the FDIC
options of US financial institutions. perspective”
“The US lags behind its global peers
in the development of a covered bond “Now we have legislation in both the
market because we lack a legislative House and Senate with wide bi-partisan
framework for issuers and investors,” said support,” he said. “That’s a rare thing in
Hagan, a member of the Senate Banking Congress these days and a good sign for
Committee. “With a legislative framework the prospects of the legislation going
in place, US financial institutions will have forward.”
Kay Hagan: “The US lags behind
a powerful tool that can be used to fund Bert Ely, a financial institutions and
its global peers”
loans to small businesses and households.” monetary policy consultant who also
Corker led a previous Senate covered testified at the March HFSC hearing,
bond initiative, while Schumer earlier that it might be a little bit of a token said that although the Senate initia-
this year said that he could introduce gesture,” said Ralph Daloisio, managing tive is welcome, it might not move too
such a bill after seeing Republican Con- director, Natixis, and a member of the quickly and further progress in the
gressman Scott Garrett, alongside Demo- American Securitisation Forum who tes- House of Representatives is probably
crat Carolyn Maloney, introduce legisla- tified at a HFSC hearing in March. “But necessary first.
tion into the House of Representatives. this looks much more choreographed— “The fact that Garrett got his bill
There had been fears that the Federal very closely mirroring what came out of through the HFSC started to be some-
Deposit Insurance Corporation’s concerns the House Financial Services Committee thing of an impetus to get the ball mov-
regarding covered bonds and its lobbying and with four sponsors, all members of ing into the Senate,” he said. “It may still
against Garrett’s legislation might have the Senate Banking Committee. It sounds have to see the House floor first and if the
dissuaded Senate Banking Committee like [Senate Banking Committee chair- House passes the bill that ups the pres-
members from moving forward. man] Tim Johnson is going to have to put sure on the Senate.”
Market participants said that they were it on the agenda. Fitch said that the Senate legislation
pleased to see the bill being introduced. “The only dark cloud is the FDIC per- “generally sticks closely” to the House leg-
“A few weeks ago we realised some- spective,” he added. “They are not very islation, aside from expanding the defini-
thing was going to materialise in the Sen- happy it’s come out in this way with the tion of eligible issuers and changing the
ate Banking Committee, but we thought four Senators supporting it.” proposed regulator for certain issuers.
4 The Covered Bond Report November 2011

7. MONITOR: LEGISLATION & REGULATION
NHB
India seeks covered bond road-map
India’s National Housing Bank has estab- to MBS. And then we will see its customis-
lished a working group to look at the po- ability to the Indian context.”
tential for covered bonds to support the NHB has previously supported secu-
country’s fast-growing housing market. ritisation initiatives and MBS transac-
“We are looking to explore the market tions, but the MBS market is subdued,
for covered bonds and the need for such said Verma, particularly in the aftermath
an instrument in the industry, so we have of the sub-prime crisis.
brought together the institutional repre- “A number of lessons have been learnt,”
sentatives to work in the Group to study he told The Covered Bond Report, “and National Housing Bank offices,
the feasibility, and make recommenda- we are exploring how the market can use New Dehli: housing regulator
exploring covered bonds
tions on what the prospects look like and some variants of securitised instruments,
what the road-map should be,” said RV such as covered bonds, and bring lenders/
Verma, chairman and managing director originators to bear greater responsibil- 7%-8% of GDP, which Verma said “needs
of the National Housing Bank, which is ity, as the investors in covered bonds will to be scaled up quite substantially”.
a subsidiary of the Reserve Bank of India have recourse to the balance sheet of the NHB regulates specialist housing fi-
responsible for supporting and regulating lenders. So there’ll be lot more responsi- nance companies, which were histori-
housing finance. ble origination and close supervision and cally the leaders in the housing finance
“We will be taking inputs from different monitoring by the lenders themselves.” industry. However, they now account for
players, including, of course, the govern- According to Verma, mortgage lend- around 30% of origination, with banks
ment in due course, because of the legis- ing is growing 20%-21% year-on-year, — which NHB also has links with — in-
lative aspect,” he told The Covered Bond with new lending of around $30bn creasing their market share, said Verma,
Report. “Also, we are drawing on the inter- (INR140bn) annually and outstand- with around 70% of new business origi-
national experience of the role played by ing mortgages totalling about $120bn nation and a similar proportion of out-
covered bonds as an alternate instrument (INR564bn). This is equivalent to around standing mortgages.
SOUTH KOREA
Koreans mull legislation as Woori mandates
The Financial Services Commission is ABS Act — although Woori Bank in Oc- Moody’s said in a report in October that
considering establishing dedicated leg- tober awarded Royal Bank of Scotland the June guidelines are credit positive and
islation to allow South Korean banks the mandate to arrange a covered bond provide the country’s issuers with a “road-
to issue covered bonds, FSC chairman programme and Korea Housing Finance map” to navigate, while also benefitting in-
Kim Seok Dong told a parliamentary Corporation has issued covered bonds vestors by reducing uncertainties about the
meeting on 10 October. backed by pooled collateral from its mem- consequences of an issuer bankruptcy and
The FSC and Financial Supervisory ber banks under an act governing KHFC. establishing disclosure requirements.
Service (FSS) on 30 June issued best According to FSC spokesperson Ernst “Korea is a heavily regulated civil law
practice guidelines that the regulators Lee, the commission will review the ne- country and issuers are cautious to obtain
described as intended to provide a cessity for Korean banks to issue covered regulatory blessing before issuing a new
framework for covered bond issuance bonds, and will look at making improve- instrument in the market,” said Jerome
to help diversify banks’ financing instru- ments to covered bond guidelines issued Cheng, vice president, senior credit of-
ments and encourage more long term at the end of June. ficer at Moody’s. “Although Korean banks
and fixed rate mortgage lending. “FSC is studying cases of other recognise the merits of issuing covered
In the absence of a covered bond countries for covered bond issuance bonds and are interested in issuing them,
framework only one Korean bank has is- and will try to synchronise with market it is not surprising that before the regu-
sued a covered bond on a standalone demands in terms of timing,” he told lator published the guidelines, they have
basis — Kookmin Bank, under Korea’s The Covered Bond Report. taken a wait-and-see approach.”
November 2011 The Covered Bond Report 5

8. MONITOR: LEGISLATION & REGULATION
ECBC
Label unveiled, regulatory recognition sought
The European Covered Bond Council ket participants,” it said. “The long term
has released criteria — including a trans- objective of the initiative is to promote ECBC chairman Antonio Torío
parency element — that issuers will have liquidity and strengthen covered bonds’ addresses the Barcelona plenary
to satisfy to be eligible for a covered bond secondary market activity.”
“label” under an initiative it has been
working on. “The long term objec-
Proposals for implementation of the
Covered Bond Label Convention, as it
tive of the initiative is
has been dubbed, will be put to an ECBC to promote liquidity”
plenary in spring 2012.
“The Covered Bond Label is a key pri- Speaking at an ECBC plenary in Bar-
ority for the ECBC, which is developing celona in September, its chairman, Anto-
the initiative in co-operation with issu- nio Torío, said that the labelling initiative
ers, investors and regulators with the aim is a process that takes time and has neces-
of ensuring that the views of all stake- sitated “a lot of thinking to put together
holders are incorporated,” said the coun- the pieces”. standards of the asset class in a chang-
cil on releasing the details in October. “The efforts on behalf of issuers to ad- ing environment”, said Torío, noting
The core characteristics the ECBC here to the label need to be recognised by that covered bonds had provided Eu-
has drawn up and that issuers will have regulators and we hope that if we provide ropean issuers with market access be-
to satisfy are featured in the accompa- enough of a solid proposal that regula- cause the asset class had been perceived
nying boxes. tors will feel compelled to treat the asset as not being “quote unquote, tainted”
The transparency element is intro- class in an enhanced way,” said Torío. by the inclusion of other assets and
duced in the last of these. National bod- Another objective is to “maintain structures that make it more complex
ies will determine what information is- and further develop the existing high and possibly riskier.
suers in their jurisdiction can satisfy and
provide based upon guidelines listed in I Legislation safeguards
an annex. a) The CB programme is embedded in a dedicated national CB legislation;
“This definition of the required char- b) The bond is issued by — or bondholders otherwise have full recourse, direct or
acteristics is complemented by a trans- indirect [including pooling models consisting only of covered bonds issued by
parency tool to be developed at national credit institutions] to — a credit institution which is subject to public regulation
level based on ‘Voluntary Label Trans- and supervision;
parency Guidelines’,” said the ECBC. c) The obligations of the credit institution in respect of the cover pool are super-
The labelling process will be based vised by public supervisory authorities.
upon a process of self-certification, said
the ECBC. The ECBC steering committee II Security features intrinsic to the CB product
will be the decision-making and supervi- a) Bondholders have a dual claim against:
sory body, with market participants able
to provide input through an advisory
council. The practical operations of the in priority to the unsecured creditors of the credit institution; the financial assets
labelling process will be run by a label eligible to be part of the cover pool and their characteristics such as credit qual-
secretariat. ity criteria are defined in the national covered bond legislation which complies
The ECBC said that the initiative high- with the requirements of Article 52(4) of the UCITS Directive.
lights to investors the value and quality of b) The credit institution has the ongoing obligation to maintain sufficient assets in
covered bonds and further enhances the the cover pool to satisfy the claims of covered bondholders at all times.
recognition of and trust in the asset class. c) Issuers are committed to providing regular information enabling investors to
“The label will also improve access analyse the cover pool, following the guidelines developed at national level
to relevant and transparent information (see Annex I).
for investors, regulators and other mar-
6 The Covered Bond Report November 2011

9. MONITOR: LEGISLATION & REGULATION
“We saw more participation from bank treasuries
than we had a year ago” page 28
LETTRES DE GAGE
Luxembourg specialist bank principle could go
A draft update of Luxembourg’s covered many’s Pfandbrief market, which was centred There are five covered bond issuers in
bond legislation has been circulated that The on the specialist bank principle, whereby Luxembourg: Dexia LdG Banque, Euro-
Covered Bond Report understands could the activities of most issuers were restricted. hypo Luxembourg, NordLB Covered Fi-
remove the specialist bank principle from However, this was removed when a new nance Bank, Hypo Pfandbriefbank Inter-
the country’s framework. Pfandbrief Act was introduced in 2005, al- national (a subsidiary of Hypo Real Estate),
An official at a Luxembourg issuer in lowing universal banks to issue. and Erste Europäische Pfandbrief- und
early November said that the draft has been Bankers in the duchy have been work- Kommunalkreditbank, wholly owned by
out since 28 October and had yet to be dis- ing on possible changes to Luxembourg’s Commerzbank.
cussed by interested parties, so further de- legislation for some time, according to
tails could not be released. Michael Schulz, head of fixed income re-
Luxembourg’s Chambre des
However, a market participant said the search at NordLB.
Députés: legislative changes afoot
main change in the update will be to remove “They have been planning to bring in
the specialist bank principle in favour of allow- this new legislation since 2010,” said, “but
ing universal banks to issue covered bonds. developing a new legislation needs time.
Luxembourg’s lettres de gage framework “I know now that the process is speed-
was established in 1999 and drew upon Ger- ing up now.”
UK
FSA sets out compliance best practice
The UK’s Financial Services Authority in November provided “You should consider whether you should enhance the second
“thematic feedback” based on annual reviews for the first time line oversight of your programme in light of the examples below.”
in a letter to the country’s Regulated Covered Bond issuers, with
the compliance function within regulated programmes in focus. FSA’s expectations for second line oversight include:
The letter, representing “finalised guidance”, was published
on 2 November and set out the FSA’s expectations of minimum curacy of regulatory and investor reporting, aware of and
standards that compliance functions — referred to also as monitoring breaches);
“second line oversight” — should meet within regulated pro-
grammes as well as examples of good practice by RCB issuers. of the compliance function in relation to the programme.
John Wu, senior associate, capital markets team at the FSA, told Appraised of relevant regulatory developments, and able
The Covered Bond Report that the FSA’s RCB team felt it would be to provide advice internally as appropriate; and
valuable to communicate to RCB issuers some of the findings of its
annual reviews, with compliance functions a “theme of interest”. expertise in covered bonds, evidence of ability to chal-
“We thought it would be a good idea to communicate what lenge management.
good points issuers were doing and let other firms know what
is indeed best practice,” he said. “It doesn’t reflect changes in Examples of good practice:
our expectations, as we have always looked at compliance as
an integral part of a programme’s operation.” bond management committees and relevant steering
The letter is addressed to the signatory of the “RCB 1D Annual At- groups with full access to relevant minutes and MI;
testation of Compliance” as the official responsible for ensuring that
arrangements relating to the management of a programme, includ- with clear channels of escalation between i) first line and com-
ing governance and oversight, meet the expectations of the FSA. pliance function, ii) independent upwards escalation of issues
“We recognise that the specific role carried out by the com- from the compliance function and senior committees; and
pliance function may vary between issuers, with certain aspects
of oversight shared between other second line functions,” said provides advice on changes in regulatory environment and
the FSA. “Below, we set out our expectations and provide ex- is engaged in providing responses to regulatory changes.
amples of areas of good practice that we have observed.
November 2011 The Covered Bond Report 7

10. MONITOR: LEGISLATION & REGULATION
INVESTORS
ICMA CBIC sets half-yearly standard
Half yearly reporting has been decided Some market participants have ex-
upon as the standard for a transparency pressed concern that the CBIC is being
initiative of the ICMA Covered Bond In- too demanding of issuers, but Claus Tofte
vestor Council, which has agreed what Nielsen, chairman of the CBIC, told The
issuers need to do to be admitted to its Covered Bond Report that the transpar-
platform. ency standards were always designed to
The decisions were taken at a CBIC be a wishlist. He said that he realised that
meeting in mid-October, following a some issuers — in Germany, for exam-
consultation held by the investor group, ple — might be able to rely on domestic
which aims to finalise its transparency investors who did not require so much
standards by year-end. The meeting fo- data.
cussed on discussing practical aspects of “I’m quite relaxed about that,” said
the investor group’s transparency project, Nielsen.
with subsequent meetings due to focus But he said that the initiative reflected
on the data fields envisaged by a draft Nathalie Aubry-Stacey: “It is about the needs of international investors and
template. ease of access but also comparability” that it was up to issuers if they decided
According to a statement from the to follow it.
CBIC, members agreed that only issuers Aubry-Stacey said that agreement on this The investor body is also holding
using the group’s template will be allowed as the desired frequency of reporting was meetings with members and others that
to post to a dedicated CBIC webpage, a easily reached. responded to its consultation discussions
condition that Nathalie Aubry-Stacey, “It should be easy for issuers to do,” on two related areas: investors’ needs and
secretary of the CBIC and director, regu- she said, “and the emphasis is on data be- additional fields; and clarification of defi-
latory policy and market practice at the ing published quickly after the results so nitions and concepts.
International Capital Market Association that it is up-to-date.
(ICMA), said was key. “Issuers can always decide to publish more.” “Issuers can always
“Having one template for all issuers is
quite important for the group,” she told
The idea of setting minimum report-
ing standards that issuers need to meet to
decide to publish
The Covered Bond Report. “It is about be able to post to the CBIC website was more”
ease of access via a single webpage but also discussed, but the group decided
also the comparability of the template.” against setting such a threshold. The CBIC will also seek to provide
The CBIC said that while members “Although it was agreed that there clarification on some items on the data
recognise that insistence on issuers using should be a minimum of policing and list that was consulted upon. It said that it
its template “could generate additional that too little relevant information would welcomed some national issuer associa-
administrative burden for issuers” they not be helpful,” said the CBIC, “there tions’ willingness to provide their own,
also consider it would help fuel stand- would not be any minimum standards.” standardised definitions and would con-
ardisation and “be a great advantage for Some market participants have not- sider feedback on circumstances where
the European covered bond market and ed that the range of information being data may or may not be appropriate to
would eventually lower funding cost”. sought by the CBIC is extensive, and the any particular jurisdiction’s “national
It was also agreed that the CBIC tem- CBIC discussed such feedback. traditions”.
plate — which will take into account re- “It was noted that this was expected as Michel Stubbe, head of the market
sponses from the consultation and bilat- it represented the needs of investors and operations analysis division at the Eu-
eral discussions with issuers and national reflected the fragmentation of the Euro- ropean Central Bank, said at a European
associations — be independent from oth- pean covered bond market – some inves- Covered Bond Council plenary in Barce-
er national templates and be presented in tors having a focus on the cover pool, lona in September that the CBIC initia-
Excel format. others on the general issuer section,” tive was very important and could help
Data should be reported on a half- said the CBIC. “It is for each investor to reduce reliance on the rating agencies by
yearly basis shortly after issuers publish decide what analysis and focus they will allowing investors to make more autono-
their results, according to the CBIC. take on the data received from issuers.” mous analyses.
8 The Covered Bond Report November 2011

11. MONITOR: LEGISLATION & REGULATION
“The number of dealers that will trade covered
bonds has definitely expanded” page 29
STRUCTURED BONDS
Germans consider Pfandbrief break-out
Several German financial institutions are “The basic idea behind ‘unregulated’ Bernd Volk, head of covered bond
understood to be considering the possi- covered bonds is to set up a structure research at Deutsche Bank, highlighted
bility of issuing structured covered bonds comparable to what we know from UK concerns the financial authorities might
alongside Pfandbriefe, as they seek new covered bonds, i.e. a segregation of assets have, while acknowledging the attrac-
ways of raising secured funding. in a special purpose entity in combina- tions of the project to pbb.
Deutsche Pfandbriefbank (pbb) said in a tion with a senior unsecured bond issued “We argue that a legislative decision for
presentation in September that it is “analysing by a bank,” said UniCredit’s analysts. a specific covered bond (e.g. the German
possibilities of structured covered bonds” and “The special purpose entity would then Pfandbrief) generally suggests that further
a market participant familiar with the discus- guarantee the timely payment of interest contractually based covered bond struc-
sions said that he could imagine structured and principal in addition to the unse- tures are vulnerable from a legal point of
covered bonds might also make sense for the cured claim versus the bank.” view,” he said. “On the other hand, a pure
likes of Eurohypo and Landesbank Baden- They said that although many details re- wholesale funded bank like pbb does not
Württemberg. Pbb prefaced the idea by say- mained unclear, Krauss explained how this have to deal with subordination of deposi-
ing that “high OC requirements highlight would fit with German laws and regula- tors and actually may find ways to opti-
need for alternative approaches, e.g. using tions to create what he said would be “quite mise its funding structure via introducing
non-encumbered assets”. a strong legal body”. UniCredit’s analysts a further covered bond format.”
According to analysts at UniCredit, said that the assets considered as having the Any such issuance from pbb would
Stefan Krauss, partner at Hengeler Muel- most interesting potential for such a cov- not, however, be without precedent,
ler, presented a concept for an “unregu- ered bond are: mortgage loans not included with Landesbank Berlin having launched
lated” covered bond at the event where as Pfandbrief cover, corporate loans (SMEs structured covered bonds alongside
pbb discussed its thinking. and others), and consumer loans. Pfandbriefe, albeit in small amounts.
SME LOANS
Italians rule out structured, mull SMEs
Any moves in Italy to create we have securitisation and access of small and medium enterprises to
an instrument similar to cov- we have covered bonds; we loans, to savings, that’s another issue.
ered bonds but backed by don’t have something in the “It could be advisable that the law
lending to small and medi- middle. facilitate this process.”
“So it would be very dif- Alfredo Varrati, senior analyst, credit
need to be done through a ficult to create through a department, at the Italian Bankers’ As-
new law, an official at the private initiative something sociation (ABI) said that structured cov-
Italian Treasury told The different.” ered bonds would not work in Italy.
Covered Bond Report. Alfredo Varrati: “The Forese said that were “In Italy any covered bond issued
Responding to a report way to another kind of the government to look at outside Law 130 of 1999, which is our
that the Italian government covered bank bond would ways in which small and securitisation law, would definitely not
is considering structured be a legislative one” be an option,” he said. “There would be
covered bonds, Giuseppe could be supported, legis- problems in terms of assignment of the
Forese, head of prudential regulation at lation could be drawn up. assets to the SPV, ringfencing, clawback
the Italian Treasury, said that the article “The label OBG can be used only for clauses, tax exemptions and so on.
was incorrect. specific covered bonds which are in line “In other words, the way to another
“The headline of the article was ex- with the very strict criteria defined by Italian kind of covered bank bond would be a
actly the contrary of what I said,” said law,” he said. “If we want to create some legislative one.”
Forese. “In my view, it is not possible to different kind of instrument — which is not He said that the ABI is discussing with
introduce something like that because named covered bonds but can be regu- the Treasury the idea of covered bond type
we have in Italy two kinds of instrument: lated by a law — in order to facilitate the instruments to finance SME lending.
November 2011 The Covered Bond Report 9

12. MONITOR: LEGISLATION & REGULATION
Moro
Moroc
AUSTRALIA
Warning on secured, but covered boosted
Australian regulatory and central bank Debelle. “That is the fundamental point of
officials warned of an overreliance on se- differentiation between the various forms
cured funding at an Australian Securitisa- of funding.
tion Forum conference on 21 November, “But ultimately, everyone can’t be at the
although APRA and RBA Basel III meas- front of the queue.”
ures could be positive for covered bonds. On 16 November APRA released a
Charles Littrell, executive general man- discussion paper on the Basel III liquidity
ager, policy, research and statistics at the framework, while RBA announced chang-
Australian Prudential Regulation Author- es to its list of repo-eligible securities and
ity (APRA), said that a historic shift may be margins, and released details of a com-
underway from banks being mainly unse- mitted liquidity facility (CLF) designed to
cured borrowers to banks pledging “a great help banks fulfil liquidity coverage ratio
deal of collateral” as they turn to a mix of (LCR) requirements under Basel III.
collateral-based funding, whether that be Guy Debelle: “I see the role of Daniel Yu, analyst, financial institu-
securitisation, covered bonds, more col- covered bonds as primarily broadening tions group at Moody’s, told The Covered
lateral for trading exposures, and the prob- the potential investor base.” Bond Report that RBA for the first time
able exploration of repos in the context of introduced an explicit reference to cov-
liquidity and other needs for authorised covered bonds is likely to be offset to some ered bonds as part of the changes it an-
deposit-taking institutions (ADIs). extent by a demand from unsecured debt nounced, with there previously having
“Although each of these initiatives indi- holders for more compensation in the fu- been no need to do so because Australian
vidually may give an ADI cheaper funding ture,” he said. “So I see the role of covered banks only recently received regulatory
or better trading terms,” he said, “a whole bonds as primarily broadening the poten- approval to issue such debt (see Monitor
industry with lots of collateral pledged is tial investor base rather than a means of Market for more on the first Australian
most unlikely to make the remaining de- reducing overall funding costs for banks.” covered bond issues).
positors and unsecured creditors safer. Debelle said that Australian banks are Covered bonds are included in an
“This is an issue that APRA and other primarily likely to turn to covered bonds as “ADI-issued securities” category in RBA’s
regulators will need to wrestle with over an offshore funding source because domestic list of eligible securities, with separate
the next several years.” investors are more comfortable with MBS. margin scales based on debt with mini-
Also speaking at the conference in Syd- He questioned the extent of the differ- mum ratings of Aaa, Aa3, A3, Baa1, and
ney, Guy Debelle, assistant governor, finan- “other rated”. The RBA said that it will
cial markets at the Reserve Bank of Australia “Ultimately, everyone increase haircuts on securities pledged
(RBA), said that investors clearly prefer se-
cured debt in the prevailing risk-averse envi-
can’t be at the front with the central bank and, with lower
rated securities facing relatively larger
ronment, but that the trend toward predom- of the queue” increases in margins, covered bonds, by
inantly secured issuance is not sustainable. virtue of their high ratings, will become
“Banks can’t encumber their balance ences between the various forms of bank more attractive.
sheets through secured issuance to such wholesale funding, noting that they are In a report, Yu and colleagues said that
an extent that unsecured issuance, and all claims on a bank’s balance sheet in one the favourable repo margin on covered
even deposit gathering, is no longer pos- form or another, and that the main differ- bonds relative to unsecured bank debt will
sible,” he said. “Too much issuance of cov- ence is the degree of credit enhancement benefit Australia’s major banks because it
ered bonds and you’re effectively back in provided by subordination in the case of has the potential to increase demand for
the unsecured world.” RMBS or overcollateralisation (and addi- such securities, of which the major banks
Although a cap of 8% on assets encum- tional recourse to the balance sheet) in the are likely to be the main issuers.
bered by the issuance of covered bonds by case of covered bonds. Moody’s also noted that over the long-
Australian ADIs protects deposits, he added, “The strong motivation for the current er term APRA could deem covered bonds
the introduction of covered bonds subordi- preference of investors for secured issu- eligible for LCRs as Level 2 high quality
nates unsecured debt holders to a degree. ance is about repositioning themselves to- assets, which would further raise their at-
“Any pricing gain obtained from issuing wards the front of the creditor queue,” said tractiveness for investors.
10 The Covered Bond Report November 2011

13. MONITOR: LEGISLATION & REGULATION
occo Parliament, with caption:
cco’s parliament could consider
legislation in 2012
“The guts of both the House and Senate bills are
very similar” page 30
AFRICA
Moroccan draft could herald African first
Morocco’s ministry of economy and fi- year over the past five years. A presenta- aimed at institutional investors. Interest in
nance has been preparing covered bond tion on the draft law noted a “remark- issuing covered bonds stems mainly from
legislation that could be finalised and able” development of mortgage lending, Morocco’s largest banks, he added.
ready to present to parliament by the end which has grown from Dh54bn in 2005 Fouad Bendi, deputy director at Magh-
of the year, an official at the ministry told to Dh188bn (Eu16.8bn) in 2010. reb Titrisation, Morocco’s first securi-
The Covered Bond Report. Morocco has had a securitisation law tisation company and the first in north
No covered bond has yet been is- in place since 2002, when the first trans- Africa, said he sees covered bonds and
sued out of Africa, so any Moroccan deal action took place. The law was amended securitisation as complementary fund-
could be the continent’s first. in late 2008 to broaden the range of assets ing instruments, in particular as covered
Nouaman Al Aissami, head of the that can be securitised — which had ini- bonds will only be allowed to be backed by
credit division at the ministry of econ- tially been restricted to residential mort- mortgage or public sector assets.
omy and finance, said that work on the gage loans — and to adopt a more secure “There are not many financing instru-
project began more than a year ago. A and developed framework. ments in Morocco, so any additional one
draft prepared by the ministry and final- Al Aissami said that the international is a bonus,” he said.
ised in June is being reviewed by inter- financial crisis had brought covered bonds
ested parties including the central bank. to the Moroccan government’s attention
“Our objective is to have concluded and prompted it to use the instrument to
the review by the end of this year,” said add to the funding sources available.
Al Aissami. Boudewijn Dierick, head of struc-
Morocco has elections in November tured covered bonds at BNP Paribas, said
and market participants hope that the that the project is in the early stages and
legislation will be presented to parlia- part of wider efforts to develop Morocco’s
ment in 2012. finance sector.
The initiative to set up a dedicated “Covered bonds will in the first in-
legal framework for issuance of cov- stance be an asset class for domestic in-
ered bonds (obligations sécurisées) was vestors,” he said.
driven by a rapid expansion of Morocco’s Al Aissami said that issuance is likely to Morocco’s parliament could
mortgage market, according to Al Aissa- take place primarily in the domestic mar- consider legislation in 2012
mi, which has grown more than 20% per ket, but that there may be some issuance
ICELAND
Covered offer Íslandsbanki wholesale return
Íslandsbanki announced in early October Íslandsbanki, which is intended to broad- suer of new bonds on the Nasdaq OMX
that it has obtained the necessary licence en the funding sources of the bank,” said Iceland Stock Exchange.
from the Icelandic Financial Surveillance the bank in a statement. “Today, deposits “The covered bonds are issued pursuant
Authority to issue covered bonds, ahead count for up to 75% of Íslandsbanki’s fund- to Icelandic law on Covered Bonds nr. 11
of up to ISK5bn (Eu31m) of issuance by ing, but the future goal is to lower that ratio from 2008, which imposes strict require-
year-end. and make the bank less dependent on de- ments on any issuer,” said Íslandsbanki.
An Íslandsbanki official told The posits as a funding source.” “For example, the collateral is required to
Covered Bond Report that the covered The Íslandsbanki official said that pass a weekly stress test in regards to inter-
bond issuance would represent the first covered bonds would enable the bank est rates and currency rate fluctuations.
wholesale funding by a major Icelandic to better match its assets and liabilities. “The Icelandic FSA will carefully mon-
financial institution since they were na- Íslandsbanki said that the bonds will itor covered bond issuance,” it added.
tionalised following their collapse. primarily be offered to investors in Ice- Íslandsbanki is not rated and its cov-
“This is a part of the funding strategy of land and that it will thus be the first is- ered bonds will be unrated.
November 2011 The Covered Bond Report 11

14. MONITOR: RATINGS
Ratings
S&P
Methodology part of ratings resilience
Many of Standard & Poor’s covered bond
Summary effect of issuer downgrades
ratings would be resilient to moderate Programmes downgraded (left scale)
stress in the shape of one to two notch is- Programmes downgraded with ALMM improvement* (left scale)
Average change in credit quality(right scale)
suer downgrades, according to the rating (%) Average change in credit quality with ALMM improvement (right scale)
agency, which it said is partly due to over- 70 1.40
collateralisation demands resulting from a 60 1.20
(Number of notches)
50 1.00
change to its methodology in 2009.
40 0.80
S&P looked into the availability of un- 0.60
30
used potential ratings uplift based on a sam- 20 0.40
ple of 87 programmes and carried out an 10 0.20
analysis to investigate the overall sensitivity 0 0.00
1 2 3
of its sample of programmes to underlying *By One ALMM classification
Source: Standard & Poor’s 2011
issuer downgrades. This was on the as-
sumption that the asset-liability mismatch programmes would remain rated triple-A, However, most covered bond pro-
(ALMM) risk that helps determine the max- with a further 54% rated double-A. grammes rated by S&P are already classi-
imum potential uplift between the ICR and Sabrina Miehs, director, covered bond fied as having low ALMM risk, said Miehs.
a covered bond rating does not change, with ratings at S&P, said that in the rating agen- S&P said that the ratings stability re-
the analysis also leaving aside country risk, cy’s view the analysis shows that its cov- vealed by its scenario analysis is partly
which could additionally constrain how ered bond ratings react only very margin- due to the rating agency only rating pro-
high S&P rates a covered bond programme. ally to a moderate hypothetical stress of a grammes triple-A if they are highly over-
The scenario analysis, published in late one to two notch issuer downgrade. collateralised, regardless of how highly it
October, showed that in the event of a uni- Andrew South, senior director, structured rates the issuer.
form one notch lowering of all respective is- finance, S&P, said that the scenario analysis Miehs said that this was a decision tak-
suer ratings only 23% of programmes in the does not take into account the scope that is- en when the rating agency switched to its
sample, by number, would likely have their suers have to manage their programmes to new covered bond rating criteria in 2009.
ratings downgraded, and that the average lower asset liability mismatch risk. “It was very important for us not to in-
change in credit quality would be a lower- clude any benefit from the issuer rating in
ing of 0.23 notches. Assuming issuer down- “When an issuer the calculation of target overcollateralisation
grades of two to three notches 41% and 66%
of covered bond programmes, respectively,
rating is lowered the levels,” she said. “Our criteria are set up to
size the level of overcollateralisation to ad-
would be cut, the rating agency said. target level of OC dress the risks in covered bonds from day
However, S&P said that the majority of
programmes would remain rated double-
does not change” one, without a link to the issuer credit rating,
so that when an issuer rating is lowered the
A or triple-A even under the “relatively “There is still some room for resilience target level of OC does not change.”
substantial scenarios” of issuer down- that could offset issuer downgrades,” he said. This approach avoids putting addition-
grades of up to three notches. S&P’s report said that a reduction of al financial stress on the issuer, she added,
“For example, we currently rate 86% of ALMM risk so that a programme is classi- which would otherwise find itself needing
programmes in our sample AAA,” it said fied one category better would increase by to increase overcollateralisation to main-
in the report. “If we downgraded all of the one notch the maximum potential number tain the covered bond rating.
underlying issuer ratings by one notch, of uplift from an ICR, which would reduce In its report S&P said that this contrasts
76% of the programmes would remain the number of covered bond programmes with the approach of some other rating agen-
rated AAA, with a further 17% rated in whose ratings would be cut in a hypotheti- cies, which it said may assign their highest
the AA rating category.” cal case of an issuer downgrade. rating to a covered bond programme with
If all of the underlying issuer ratings The proportion of programmes down- less overcollateralisation on the basis that
were cut by three notches, 87% of the graded would fall from 23% to 13%, from the issuer’s credit rating is relatively high.
programmes in the sample would remain 41% to 33%, and from 66% to 64%, respec- “Adding more collateral to the cover pool
rated in the triple-A and double-A rating tively, under the one, two, and three notch is- may be challenging in a financially stressed
categories, it added, of which 33% of the suer downgrade scenarios mentioned above. environment,” it said.
12 The Covered Bond Report November 2011

15. MONITOR: RATINGS
MOODY’S
Discretion a better imparter of value
Support for covered bonds has so far an issuer’s discretion could therefore be hood that investors will need to rely on the
outweighed credit negatives that issuers’ seen as a credit negative. assets in the cover pool,” he said. “This is
discretion over their programmes could “But an important benefit of a covered because after a bail-in, the issuer can con-
imply, according to a Moody’s official, bond programme is that the issuer can tinue to service the covered bonds.
who also said that it is too early to deter- support the covered bond programme if it “This assumes that secured debtors
mine what impact bail-ins could have on wants to,” he added. “And to date the posi- won’t be bailed in, and most of our discus-
its methodology. tive credit impact of issuers adding fur- sions so far suggest that secured debt will
For a Q&A prefacing a new covered ther support to their covered bond pro- be excluded from bail-ins. So it may not
bond compendium publication produced grammes has more than outweighed any be right to assume that a default of the is-
by the rating agency, Nicholas Lindstrom, potential negative credit impact stemming suer supporting the covered bonds is the
senior vice president, covered bonds, at from issuer discretion.” point at which investors have to rely on
Moody’s, was asked how the rating agen- Lindstrom also addressed the ques- the cover pool.”
cy takes into account the large amount of tion of whether bail-in frameworks being But Lindstrom said that it is not yet
discretion issuers enjoy over the credit developed might make Moody’s recon- known what the final details of all reso-
quality of their programmes. sider whether it is appropriate for senior lution regimes that incorporate burden-
“The short answer is that we penal- unsecured ratings to be the correct refer- sharing will be.
ise the programme’s rating for certain ence point in determining the likelihood “What’s crucial is that we’ve seen little
actions that could be detrimental to the of investors having to rely on a cover pool guidance on whether the covered bond
pool, but give limited uptake for positive to be repaid. programme of a distressed institution will
actions,” said Lindstrom. “The argument you’re referring to is be allowed to continue as part of a poten-
He highlighted several ways in which that, in a post-bail-in world, the likeli- tially functioning post-resolution entity,”
the rating agency has to reflect worst case hood of a default of the issuer supporting he said. “In those cases, we’d consider how
scenarios into its analysis and said that the covered bonds won’t reflect the likeli- to give credit for that in our analysis.”
US
BA covered cut, lack of OC support seen
Fitch downgraded mortgage covered ability of default basis (PD) provided the
bonds issued by Bank of America NA overcollateralisation is able to withstand
from AAA to AA on 24 October, prima- Fitch’s cashflow model stresses in a AA
rily due to the application of increased scenario, said the rating agency.
interest rate stresses but also because of “A credit of up to two notches above
increased loss expectations for the cover the covered bonds rating on a PD ba-
pool and a potential lack of support of sis can be applied if stressed recoveries
the programme’s asset percentage. assuming covered bond default exceed
The covered bonds and issuer rating 91%,” said Fitch.
were left on Rating Watch Negative. The rating agency said that the pro-
BA indicated unwillingness to support
The rating agency applied increased the asset percentage in future gramme’s nominal AP is 64%, less than
interest rate stresses as part of its cash- the 69% determined under Fitch’s re-
flow analysis, and also raised its loss party criteria led to an increase in the vised analysis, but that the issuer has in-
expectations for the cover pool due programme’s Discontinuity Factor (D- dicated an unwillingness to support the
to the risk characteristics of collateral Factor) from 39.6% to 40.1%. AP in the future should prepayments,
and application of its prime residential The issuer’s long term rating of defaults and liquidations reduce avail-
mortgage loss model. Both meant a de- A+, RWN, and the covered bond pro- able overcollateralisation (OC).
crease of the asset percentage (AP) sup- gramme’s D-Factor of 40.1% enable the “Fitch does not view the potential for
porting a AAA rating from 78% to 69%. mortgage covered bonds to be rated up a lack of support as consistent with an
An application of Fitch’s counter- to an unchanged level of AA on a prob- AAA rating,” it said.
November 2011 The Covered Bond Report 13

16. MONITOR: RATINGS
FITCH
Italy’s market access key
Fitch has said that any perceived loss of
market access by Italy could lead to in- Fitch said Italy’s near and medium term
creased refinancing cost assumptions and growth prospects have deteriorated
therefore higher overcollateralisation sup-
porting a given rating for Italian mortgage
covered bonds and European public sec-
tor covered bonds exposed to Italian pub-
lic sector debt.
It identified this and the reduction of
rating uplift provided by maturity exten-
sions as two consequences for covered
bond ratings should it judge the Ital-
ian sovereign to be losing market access
and cut its rating. Loss of market access
is not Fitch’s base case, but a risk that it
highlighted in a special report, “Italy: The
Challenge Ahead”, on 18 November.
The rating agency noted that if it consid-
ers that the Italian sovereign is losing market
access it will increase the stresses incorpo- lift of one notch in terms of probability occur even though the mortgage covered
rated in its covered bond rating criteria. of default above the issuer default rat- bonds’ rating would be lower than today.
Any such increase of stresses would af- ing (IDR) of the issuing bank,” it said, Fitch placed on Rating Watch Nega-
fect covered bonds with exposure to Ital- “to which a maximum two notches (or tive (RWN) seven OBG programmes and
ian assets, such as mortgage obbligazioni up to three notches if the rating of the three German public sector Pfandbriefe
bancarie garantite (OBG), and other Eu- covered bond on a probability of default (see below) after downgrading the sover-
ropean covered bonds secured by Italian basis is not investment grade) could be eign in early October. It said that existing
public sector debt, such as those issued by assigned to reflect recoveries in the case RWNs will be resolved based mainly on
Germany’s Aareal Bank, Deutsche Pfand- of default.” the recalculation of the level of overcollat-
briefbank (pbb), and Eurohypo. eralisation supporting the rating of each
Fitch downgraded Italy to A+, negative “Covered bonds programme as well as any liquidity miti-
outlook, on 7 October, and said that since
then the country’s near and medium term
would be affected in gants put in place by the issuers.
Italian issuers whose OBG pro-
economic growth prospects have deterio- two ways” grammes are rated AAA, on RWN: Banca
rated, with refinancing spreads for assets Carige, Credito Emiliano, Banca Monte
in Italian cover pools increasing. Secondly, if Fitch were to cut Italy dei Paschi di Siena, Banca Popolare di
The rating agency said that if Italy los- some covered bond issuers would also be Milano, Banco Popolare, Unione Banche
es market access and the sovereign were downgraded, it said, adding that the link- Italiane, and UniCredit.
downgraded to a low investment grade age between the covered bond rating and German issuers whose public sector
category, covered bond ratings would be the issuer could also prompt the covered Pfandbriefe are rated AAA/RWN: Aareal
affected in two ways. bond ratings to be lowered. Bank, Deutsche Pfandbriefbank and Eu-
Firstly, a scarcity of available liquidity “An increase in stressed refinancing rohypo.
for cover assets would reduce the possible cost assumptions will lead to an increase Fitch said that the ratings of German
rating uplift between an Italian issuer and in the percentage of overcollateralisation Pfandbriefe that are backed by a sig-
its mortgage covered bond rating. supporting a given rating both for mort- nificant proportion of lower rated Italian
“It is likely that the current liquid- gage OBG and European public sector public sector exposure are unlikely to be
ity gap protection in the form of 12 to covered bonds exposed to Italian public affected by liquidity concerns, but that the
15 months maturity extension for the sector debt,” said Fitch, noting that it ex- bonds are exposed to Italian credit risk
mortgage OBG would only enable an up- pects such a rise in overcollateralisation to and increased refinancing costs.
14 The Covered Bond Report November 2011

17. MONITOR: RATINGS
“Spreads should be driven by the underlying quality
of the collateral pools” page 33
SPIN-OFF
Dexia MA transferred, DKD still unclear
Dexia Municipal Agency is being spun off
to Caisse des Dépôts et Consignations and
La Banque Postale as part of the restruc-
turing of Dexia group, while the fate of
Dexia Kommunalbank Deutschland ap-
pears to remain unclear.
An agreement between Dexia, Caisse des
Dépôts and La Banque Postale, details of
which were announced on 20 October, con-
tains two main features. One is the acquisi-
tion by Caisse des Dépôts and La Banque
Postale of respectively 65% and 5% of the
shares in Dexia Municipal Agency, and a
second is the establishment of a joint ven-
ture held by Caisse des Dépôts (35%) and La
Banque Postale (65%) that will be dedicated Dexia Banque Internationale à Luxembourg: to be sold to
to originating loans to French local authori- a group of international investors
ties, refinanced through Dexia MA.
RBS covered bond analysts said the
move was positive but raised several ques-
tions, such as what would happen to the
“The future of the news anyway in particular regarding Berlin-
based Dexia Kommunalbank”.
remaining 30% stake of Dexia in Dexia Pfandbrief issuer Another analyst said that the Pfandbrief
MA and how strong was the willingness of
Caisse des Dépôts and La Banque Postale
remained unclear” issuer appears to remain a Dexia subsidiary.
Another pillar of the group’s restruc-
to provide additional support for Dexia as subject to approval by the European Com- turing includes the sale of Dexia Bank
new shareholders, if required. mission “the EU will probably not dare do Belgium to Société Fédérale de Participa-
Dexia said that under the agreement anything but approve”. tions et d’Investissement (SFPI), acting on
reached it will extend a guarantee to Dexia A press release from 20 October setting behalf of the Belgian state.
Municipal Agency against Eu10bn of struc- out the decisions taken by Dexia’s board of The spin-off of Dexia Bank Belgium is
tured loans to French local authorities as directors was silent on Dexia Kommunal- seen by many market participants as hav-
well as an indemnity against losses in ex- bank, and RBS’s Will said the future of the ing likely created a new candidate for issu-
cess of 10bp on all outstanding loans. Dexia Pfandbrief issuer remained unclear. ance under a Belgian covered bond legisla-
will in turn benefit from a counter-guaran- “Even in this morning’s press release, tive framework that is being prepared in the
tee from the French state on the portfolio there has been no statement about what will country.
of structured loans up to 70% of losses over happen to DKD,” he said. “You can see that “It’s a natural candidate,” said a cov-
and above Eu500m, subject to the approval reflected in its spreads, which have been ered bond analyst. “It’s now an isolated
of the European Commission. growing wider since September before tak- standalone Belgian bank with a domestic
“The counter-guarantee for Dexia is ing a couple jumps wider in October. retail business.”
only on the Eu10bn structured loans to “People are getting nervous,” he added. A banker familiar with the legislative
French entities rather than on the whole “They’re concerned DKD could be spun off.” project in Belgium said that Dexia was an
portfolio,” said Frank Will, head of cov- Dexia held an conference call on 9 No- active participant in discussions and was
ered bond research at RBS. “It remains vember to update analysts on the group’s “always a big fan”.
therefore even more important to what restructuring process and financial situa- “They were there from the start,” he said.
extent the cover pool structure will be tion, and a covered bond analyst said that he Other elements of the Dexia restruc-
altered by a possible transfer of troubled was surprised to hear numerous questions turing include the targeted sale of Dexia
loans to a run-off entity.” about Dexia’s financial situation rather than Banque Internationale à Luxembourg to a
Another covered bond analyst said about the restructuring process, suggesting group of international investors, with the
that while the counter-guarantee was still that “maybe the reason was that there are no participation of the state.
November 2011 The Covered Bond Report 15

18. MONITOR: MARKET
Market
AUSTRALIA
Aussie openers under fire
Australia & New Zealand Banking Group deal two days later, also at 115bp over
and Westpac launched the first ever Aus- mid-swaps, via Bank of America Mer-
tralian covered bonds in November, rill Lynch, Barclays Capital and Nomura,
avoiding the euro-zone’s troubles to tap although conditions had deteriorated in
the US dollar market, but the debuts the interim and ANZ’s deal was said to
were found wanting by some market par- have traded wider in the aftermarket.
ticipants who found their execution and Market participants away from the
performance disappointing. first Australian covered bonds were left
A mandated euro covered bond for disappointed by the jurisdiction’s debuts,
Commonwealth Bank of Australia was saying the deals had underperformed
on hold at the time of writing, with Na- since pricing, were pitched too tightly,
tional Australia Bank also yet to issue and were poorly co-ordinated.
after having initially been considered the “How have such a long anticipated
frontrunner. group of such strong institutions from
The sudden interruption in issuance such a great country ended up with this
came after a frenzy of preparatory work, result?” asked one syndicate official, with
with Australia’s major banks quick to go on ANZ: First to use Australians’ new another saying that the impact on Aus-
roadshows once the country’s parliament funding source tralia’s standing — and the implication
had approved covered bond legislation for pricing in dollars for other issuers, not
and the Australian Prudential Regulatory (LTV) valuations, prompting those issu- just from the country — was far reaching.
Authority (APRA) removed a ban on the ers that had decided to include this in Nordic issues also widened on the back
issuance of covered bonds by authorised their programmes to promote the fea- of the Australians’ underperformance.
deposit-taking institutions (ADIs). ture, with NAB said to have ultimately “The question is: why would such a
With roadshow mandates for NAB also opted for such a feature in response solid jurisdiction need to rush into the
and CBA emerging only two days after to investor feedback. market at the wrong price?” said one.
the covered bonds bill was granted royal ANZ then overcame tricky market con- “Why risk a deal not covered at the
assent on 17 October, Australian banks ditions to sell Australia’s first covered bond wrong spread that is destined to widen,
moved towards covered bond issuance at on 15 November, a $1.25bn (Eu928m/ which it did?
an unprecedented pace. A$1.24bn) five year deal at 115bp over “These are not one-off deals; the
When the bill was introduced into mid-swaps led by ANZ, Citi, HSBC, Mor- banks have significant funding to do in
parliament by Treasurer Wayne Swan, a gan Stanley, Nomura and UBS, and the re- this space. It’s hugely disappointing and
Treasury official suggested that legisla- sult was considered respectable by others. a shame.”
tion could be in place by Christmas, but John Needham, head of structured fund- Bankers close to the ANZ and West-
ultimately it took only just over a month, ing, group treasury at ANZ, said that the pac deals defended their execution.
with the House of Representatives and transaction went very well. “We had the ability to do a deal, in-
Senate passing the bill on two subsequent vestors were asking for it, ANZ had gone
days in October. “Why would such well, so we said: ‘Let’s do it.’ And we got
“I think from first reading to speech to
Royal Assent, it would have to be one of
a solid jurisdiction there,” said one.
They also defended their execution
the shorter timings on any legislation that need to rush?” against claims their pricing offered an in-
has been passed, which is one of the ben- sufficient premium versus outstandings,
efits of having bi-partisan support,” said “Conditions were pretty tough in the saying that a consensus had emerged
Andrew Jinks, a partner in Clayton Utz’s European time zone,” he told The Cov- from roadshows around the 110bp-
banking and financial services team. ered Bond Report, “but for us to bring 115bp level at which ANZ was first whis-
US and Europe-targeted roadshows, an inaugural transaction into the US and pered, ahead of 115bp area guidance.
carried out by the majors, showed in- upsize it to take $1.25bn at 115bp over “It is very easy to criticise the levels,
vestors to have a preference for the use mid-swaps — we’re very happy with that.” but investor feedback was OK around the
of indexation in ongoing loan-to-value Westpac launched a $1bn five year specific level,” said one.
16 The Covered Bond Report November 2011

19. MONITOR: MARKET
ECB
CBPP2 straitjacketed by wider crisis
The European Central Bank launched a
new covered bond purchase programme
at the beginning of November, but the
prospect of support for the asset class
failed to spark new issuance, with the
euro-zone crisis undermining any recovery.
By the time The Covered Bond Report
went to press, a week into reporting of
purchases by the European Central Bank,
no euro-zone issuers had taken advan-
tage of the second purchase programme
(CBPP2) to launch new benchmarks.
The first official details of Eurosystem
buying were released on 14 November and
after seven days Eu765m of purchases had
been reported by the European Central
Bank. Although this is below the average
weekly amount that will need to be spent
if the Eu40bn allocated is spread over the
Mario Draghi: a new ECB
year the programme is in operation, it rep- president for a new purchase
resents a faster buying rate than at the be- programme
ginning of the first covered bond purchase
programme, which ran from July 2009 to
June 2010, despite CBPP2 being smaller The only confirmed and indeed prob- “It was our understanding from the
than CBPP1’s Eu60bn. able primary market purchases were of beginning,” he added, “that the Eurosys-
Market participants said that the Eu- two taps for Crédit Mutuel Arkéa. Cen- tem wants to be involved in a real trans-
rosystem is probably unwilling and un- tral banks were allocated 20% (Eu150m) action, in the sense that they want to sup-
able to get new issuance flowing. of a Eu750m April 2021 tap and 38% port transactions that are already able to
“It seems that the Eurosystem cen- (Eu95m) of a Eu250m June 2015 increase. attract investors. That was the case in our
tral banks do not want to intervene in These were not necessarily all under the deal, which was already a success when
large sizes in the secondary market as purchase programme, but the settlement a purchase programme order was placed,
long as the sovereigns remain in such a of the trades coincided with a Eu263m although of course the programme made
distressed state and Italian and Spanish increase to the ECB’s CBPP2 tally and it possible to do a larger deal.”
covered bonds trade well through their those involved in the deal confirmed that The European Central Bank an-
sovereigns,” said Michael Michaelides, a ticket had been taken on behalf of the nounced the new programme on 6 Oc-
covered bond analyst at Royal Bank of Eurosystem. tober after the monthly meeting of its
Scotland. “The ECB and the national Thomas Guyot, financial markets, governing council, with further details
central banks probably want to keep their managing director at Crédit Mutuel forthcoming at its November press con-
powder dry and will be more active in Arkéa, told The Covered Bond Report ference (see box for the ECB’s full crite-
the primary market if and when issuance that the purchase programme did not ria), the first chaired by new ECB presi-
picks up again. have a strong impact on its deal, which dent Mario Draghi, after he took over
“A noticeable increase in the purchase had already attracted good demand be- from Jean-Claude Trichet.
volume would leave its mark in the mar- fore the Eurosystem order was placed. Some market participants were dis-
ket and could thereby have a positive ef- “The purchase programme is support- appointed that the ECB did not provide
fect on the currently paralysed primary ive of the market and demand for cov- any clarity on how the Eu40bn would be
market — but this is clearly not a pana- ered bonds in general,” said Guyot, “but shared between the euro-area national
cea given the overarching problems at the the specific Eurosystem participation was central banks and whether peripheral
sovereign level.” not decisive for our transaction. markets would be prioritised. But Vincent
November 2011 The Covered Bond Report 17

20. MONITOR: MARKET
Hoarau, head of covered bond syndicate German Pfandbriefe are the most broken than previously.
at Crédit Agricole CIB, said it was naive to market...” “Some central banks are more open
have expected more details from the ECB. But others have suggested that the to investing in other countries than they
“It happened the same way in 2009,” there are reasons for hope. A covered have done before,” he said. “For example,
he said. “They’re releasing no proper de- bond banker said that he expects central the Bundesbank will probably be a bit
tail on how this money will be allocated banks to be less domestically focused more open.”
to the different covered bond jurisdic-
tions; we will only get the information —
if we get it — when it’s already trading. ECB Covered Bond Purchases under CBPP2
“I can imagine that the allocation will
400 1,000
be based on a kind of formula consider-
ing three things: the ECB paid-in capital 800
300
share of the national central bank; the 600
Eu (m)
Eu (m)
covered bond market size of that coun- 200
400
try; and hopefully the fact that some 100
200
jurisdictions need more support than
some others.” 0 0
07 Nov 09 Nov 11 Nov 15 Nov 17 Nov 21 Nov
The first of these — money being al-
located to national central banks accord- Outstanding Volume (RHS) Daily Difference Daily Average
ing to the “capital key” — is understood Source: ECB, RBS
to have been followed, but there were no
signs in early secondary market buying
under the programme that priority was In order to be qualified for purchase under the programme, covered
being given to covered bonds from coun- bonds must:
tries where bank funding has been most
difficult — even if the ECB’s criteria have
been expanded to, for example, accom-
modate much lower rated issues than
under CBPP1.
Some market participants criticised
the Eurosystem’s strategy.
“I am reading that the Eurosystem
has purchased approx Eu100m of Ger-
man Pfandbriefe and 10m of Portuguese
Obrigações today,” said a portfolio man-
ager. “If this is correct, it’s a waste. As if
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18 The Covered Bond Report November 2011